Facebook Rising: UBS Ups to Buy, Bulls Cheer Instagram Video

By Tiernan Ray

Shares of Facebook (FB) are up 35 cents, or 1.4%, at $24.25, bucking a weak Nasdaq, as one skeptic on the stock is converted: UBS’s Eric Sheridan ups his rating to Buy from Neutral, and raises his price target to $30 from $28, writing that the stock’s valuation is low in light of the fact the company is pushing forward with new monetization efforts.

Sheridan raises his estimate for this year’s revenue to $5.92 billion from a prior $5.81 billion estimate, and raises his 2014 advertising revenue estimate for the company to $7.55 billion from $7.28 billion. About 75% of Facebook revenue is advertising, the rest being payments and other miscellaneous transactions.

Among the new products is video ads, writes Sheridan:

Facebook plans to begin selling Newsfeed video ads in 2H 2013. While the specifics have not been disclosed, it has been reported that Facebook plans to sell daily slots with asking prices in the seven figure range. Each slot would target a different, broad demographic. These ads are expected to automatically play as the user scrolls through the Newsfeed (albeit on mute), and will expand if clicked by a user. That being said, it is our understanding that the final form factor of the ads (auto-play or user choice to engage) has not yet been decided. As with its existing ad offerings, we believe Facebook will have to walk a fine line in implementing these ads without disrupting the user experience. That said, we do expect these ads to gain adoption as advertisers are eager to leverage Facebook’s massive reach, according to our checks.

Video ads, obviously, are the topic of the moment given that Facebook yesterday held a press event to unveil its new video capabilities for the Instagram Web site and mobile application.

Shares slipped yesterday following the event, perhaps reflecting disappointment there was no discussion of advertising, and thus no discussion of how Facebook will monetize video.

But Sheridan seems confident monetization will follow:

Our checks also indicate that Facebook will begin serving ads on Instagram, which has not shown advertising to date. Given its skew towards younger users (shown below), this could attract a different advertiser base than standalone Facebook. Once again, Facebook must be careful not to monetize this platform too aggressively. Recall that in December 2012, Instagram attempted to revise the advertising section of its Terms of Service, but was forced to roll back the changes after experiencing a significant, negative user reaction. That said, an advertising product that does not rely on users’ content or likenesses is unlikely to face the same level of pushback.

Sheridan also thinks Facebook will be adding more context to advertising on its main site, which could help conversion:

On June 6, Facebook announced plans to reduce the number of ad products from 27 to less than half that amount over the next six months. Among the remaining ad units, Facebook plans to implement greater consistency and automatically add social context (as opposed to providing social context as a separate offering). We expect these changes will result in higher conversion, which in turn should put upward pressure on pricing longer term. We applaud this focus on a suite of core products by Facebook’s management team and believe such focus will be rewarded with increased interest from advertisers. Our expectation for higher conversion is supported by a Salesforce.com study of Facebook ad impressions during Q1 2013, which showed that Sponsored ad units were typically more effective at eliciting a user action than their non- Sponsored counterparts. Specifically, Sponsored App Install Ads were 5.7x more effective, and Sponsored Page Like Stories were 13.7x more effective.

A number of other bulls on the stock sounded off today on the virtues of Instagram’s video offering.

Youssef Squali, who has a Buy rating on Facebook shares, and a $35 price target, today writes “Introducing video into the news feed is an important step for Instagram, as it provides a richer, better user experience.”

“It also lays the ground work for an eventual monetization of the platform through video ads, a market eMarketer estimates at $4B in 2013, growing 41% Y/Y.”

Topeka Capital Markets’s Victor Anthony today reiterates a Buy rating and a $40 price target, writing that “Video should drive up user engagement on Instagram” and that “video ads sure to follow.”

The addition of video should drive up engagement on the Instagram platform. A quick check of the GooglePlay (GOOG) store highlights the enthusiasm from those who have downloaded the new working version of the Instagram app (we see several “love it”, “wow”, “awesome” “perfect” comments) to those who are eagerly awaiting a download that works (several are claiming inoperable downloads). The videos will post natively on Facebook. Instagram noted that 16B photos are uploaded each day along with 1B likes per day […] The logical conclusion we draw from the 15 second time limit compared to six seconds for Twitter’s Vine, is that Instagram will ultimately carry auto- play ads similar to what Facebook has planned. Perhaps the auto-play ads launch on both platforms simultaneously, given reports of a delayed launch of video ads on FB until the Fall. At the very least, brands can pay to promote a post that contain a video, similar to what occurs on Facebook today. In our view, Instagram is shaping up to be to Facebook what Youtube is to Google.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.